Weak metals prices and global economic uncertainty has forced zinc and copper producer HudBay Minerals Inc. to delay construction of the Fenix nickel project in Guatemala, but its large cash position could make it a takeover target.

The company has long been the subject of M&A speculation, but its shares could trade higher with a buyout premium from names like Teck Cominco Ltd., Lundin Mining Corp. or Quadra Mining Ltd., according to Wellington West Capital Markets analyst Catherine Gignac.

HudBay's net cash position at the end of the third quarter was $844-million, or $5.48 per share. Analysts see the move as a way for it to preserve its balance sheet and have more time to develop a power strategy. "With current credit market conditions and depressed metal prices, there is no opportunity to replace cash and the company wants to have a significant safety cushion," TD Newcrest analyst Greg Barnes told clients.

The company's chief executive Allen Palmiere stressed that "cash is king" and said that a dividend or share buy-back would prevent it from being able to take advantage of opportunities that may arise. "The annual budgeting and planning process is now upon the mining sector, and identifying the range of metal prices and input costs to be used will be difficult," Ms. Gignac said. "Debt and equity capital will be nearly impossible to raise at reasonable prices for the sector."

The value of the company's cash position has likely seen a substantial improvement during the recent volatility and the stock is now trading near working capital of $915-million, or $5.98 per share, with no debt, she said in a research note. The analyst thinks HudBay's board will continue to be reluctant to use its large cash position for an acquisition and would like to see a cash dividend as a result. "The cash is attractive in a credit strapped world," said Blackmont Capital analyst George Topping. "With the credit crisis, the risk of developing the project has increased massively since the third quarter acquisition."

He told clients that the company's cash offers downside protection while its three growth projects offer strong upside. Quadra, which is rumoured to have acquired a small position in HudBay, has a market capitalization of around $345-million. HudBay's is roughly $850-million.

Quadra's chief executive recently indicated that it is interested in a merger of equals and that bulking up right now is a wise move. It invested $55-million in marketable securities during the third quarter to support its M&A strategy, while it had a net cash balance of $266-million, or $4.70 per share.

However, it too is planning to hoard cash going forward in case copper prices remain weak, according to UBS analyst Onno Rutten. The price of nickel, meanwhile, has declined 80% since hitting a record high of US$242.56 per pound less than 18 months ago. "The company continues to believe in consolidating the mid-cap mining sector but no longer intends to use cash for acquisitions given the uncertain outlook," Mr. Rutten said of Quadra in a note.

Meanwhile, he sees HudBay as a solid investment choice given its ability to weather an extended recessionary commodity price scenario due to its large cash reserve and predictable operating assets, while providing upside leverage to a future economic recovery.

Ms. Gignac also suggested that the limited long-run returns expected from the Fenix project should convince HudBay to at least consider acquisition opportunities for near-term cash flow. These include other underground in Canada such as FNX Mining Co. Inc., New Gold Inc., Aurizon Mines Ltd. and Centenario Copper Corp. because of their complementary commodities and operations.

Fenix was acquired when HudBay bought Skye Resources Inc. in a share-for-share deal worth roughly $450-million in August. The miner said it remains confident that it is an outstanding asset, and will continue to upgrade local roads and maintain health care and educational initiatives in the community.

El Estor Declaration

21st October 2008

By Means of This Communique, Community Leaders of 18 Neighborhoods of the Municipality of El Estor, Izabal, Guatemala, Declare That:

Since the beginning of their exploration operations, the Guatemalan Nickel Company (CGN) in the municipality of El Estor in the department of Izabal, has met opposition of neighbors of the municipality and communities due to their non-ncompliance with Convention 169, specifically over the consultation of affected communities regarding these types of projects.

These companies are utilizing our necessities to justify their installation. With regards to job creation, we denounce their policy of sub-contracting through companies who purchase the support of neighbors who are paid miserable wages. The policies of the mining companies based in the municipality of El Estor mean the labor exploitation of people, as the companies do not wish to be saddled with the labor responsibilities.

We denounce the contamination that is going to be generated from the moment of operations, being that drilling is already being carried out scant meters from the headwaters of the water supplies upon which our towns depend.

Maya Nickel Exploration provoked the most recent incident upon beginning their operations in the Sierra de Santa Cruz within the Doña Tomasa mountains, which our ancestors named due to their great importance within the Maya cosmovision. This area is located across from the municipality El Estor, where several creek headwaters are born. Four of these springs, in an area of 800-1,000 meters between each spring, supply an entire population located throughout this mountain range. The company has announced that it is carrying out a study involving the drilling of several wells. The population has rejected this proposal and supposedly the company has ignored the decision of the neighbors and community authorities.

Some days ago several complaints were filed by residents over drilling that Maya Nickel was carrying out in Sierra Santa Cruz, and after filing a petition, a 35-person commission was formed consisting of residents, acting mayors and CODODES to verify the operations of Maya Nickel. The visit of this commission was made on September 30 of this year, verifying the operations and presence of Maya Nickel. Photographic evidence of the visit was taken by community authorities.

Direct communication was made via telephone with the local radio Mega FM where the population was informed through the news channel Denuncias y Evidencias (Charges and Evidence) who covered the visit. The charges were made in the Q'qechi language so the entire population could receive the information. Because of this complaint, Maya Nickel suspended works for five days, but has renewed operations again.

We lament the manner in which the company Maya Nickel has mocked the decisions that communities have taken, made clear by their actions, where the population has rejected exploration activities in this area. Despite the fact that we have said we will NOT permit the drilling of our sources of water, the company is not taking our decision into account and has continued its operations of drilling within the springs which produce the drinking water of the town of El Estor.

Maya Nickel is violating our human rights and our right to protect our water sources, our flora, fauna, and finally our rights to defend the life of the residents of El Estor. Maya Nickel is not respecting laws that prohibit them to operate in this area. They are violating the Convention 169 of indigenous peoples, which we denounce at all national and international levels.

This is why we are requesting:

To Municipal Mayor Joel Lorenzo Flores:

Based on the Constitution of the Republic of Guatemala, Articles 1,2, ,3,5,12,26,28,29, 33, 35,66,97,127.

We request the definitive withdrawal of the company Maya Nickel from the Sierra Santa Cruz and from the municipality of El Estor and the supposed areas of exploration.

To Minister of Environment Dr. Luís Ferrate:

A report over the permits that Ministry of Environment has given to this company to drill within the sources of water utilized by the municipality of El Estor and where it demonstrates these activities and their impacts on the environment.

To the Ministry of Energy and Mining:

That no mining concessions be awarded within the Qéqchi lands.

To the President of the Republic of Guatemala:

We request you to observe the recognition of petitions that we are making as Community Authorities to denounce these companies, who are trying to play with our vital water, and not giving importance to human beings and violating peace agreements and Convention 169. These companies are not welcome in the municipality of El Estor.